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    China Business
     Dec 23, '13

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NSA leaks sink US business deals
By Andrew M Johnson

As the world's fastest-growing market for high-tech products, China is a significant player in the business models of US tech companies. But Chinese customers don't want to do business with providers that could compromise the security of their sensitive information.

US tech titans face tough times in China
NSA spying has sent chills across the ranks of US technology companies operating abroad. From Brazil, Russia, and China to Germany and the Middle East, US tech giants are feeling the pain from a slimmed customer base and the prospect of new regulatory compliance costs that may squeeze profit margins.

(Indeed, that concern is expanding beyond information technology companies. Saab of Sweden this month won a US$4.5 billion order to supply 36 jet fighters to Brazil, beating Boeing of the United States for the deal, just a few weeks after President Dilma Rousseff said that alleged US spying on her government was an affront to her country.

"Boeing only didn't win the deal because of the lack of trust created by the spying incident, Welber Barral, Brazil's trade secretary from 2007 to 2011, told Bloomberg. "Had the decision been last year, Boeing would have won.")

With over an 80% share of the non-US cloud-computing market, US companies have dominated the industry since its inception in

the late 1990s. But a recent report published by the Washington-based Information Technology and Innovation Foundation (ITIF) estimates that the revenue losses facing US cloud providers will reach anywhere from $21 billion as a low estimate to $35 billion as a high estimate by 2016. [11] In addition to this report, the Cloud Security Alliance recently estimated that 10% of non-US companies have canceled their contracts with US-based providers since May. [12]

Google: The ongoing battle between the US intelligence community and US Internet companies is exemplified by the relationship between Google and the NSA. While Google plays a key role in the NSA's collection scheme, the company is beginning to voice its complaints with the agency. When asked recently why the company is tightening the encryption of data flowing between its processing centers, chairman Eric Schmidt stated that the improvements would "block alleged interception by the NSA". [13]

Google's move to route mainland China's users to the uncensored Chinese-language version of its service hosted in Hong Kong in 2010 brought the company into a less-than friendly spotlight. But Google's security woes reach far beyond the US or China. Brazilian legislation requiring Google to build data centers and cloud infrastructure within the country's borders may cost the company billions in the coming years.

Recently, Richard Salgado - Google's director for law enforcement and information security - stated that efforts from governments to limit the cross-border flows of information "could have severe unintended consequences, such as a reduction in data security, increased cost, decreased competitiveness, and harm to consumers". [14] It turns out that the NSA's actions have resulted in quite a few unintended consequences since the Snowden leaks started. The backlash from US surveillance has impacted several large US tech firms like Google, Cisco Systems, IBM, HP and Microsoft.

Cisco Systems: "I've never seen this before." Those were the words of Cisco Systems CEO John Chambers on a conference call to analysts in November this year as he sought an explanation for the company's sudden drop in emerging market networking gear sales. First quarter orders in China plunged 18% from a year earlier. Q1 2014 orders in Russia tumbled 30% and in Brazil 25%.

As the world's largest provider of computer networking equipment, Cisco represents a vital player in the United States' dominant position in the technology market. In a November conference call, Chambers warned of the threat of further "challenging political dynamics" in China.

International Business Machines (IBM), a global supplier of networking equipment and services, saw its third-quarter 2013 revenue in China plunge 22%.

Microsoft and Hewlett-Packard also reported a drop in Q3 revenue from China, but the companies have been less vocal about the particular details of these declines.

Other companies are also very vulnerable to the sentiments of Chinese customers. Take Qualcomm. The smart-phone chip maker derives about half of its annual revenue from China - or $12.3 billion in 2012. Significant exposure to the Chinese market makes Qualcomm (and others like it) increasingly sensitive to volatility that may result from the ongoing political tension between the US and China.

US tech companies are likely to experience continued decreases in market share, sales and a heightened degree of tension that may accompany their operations in China. This is an unfortunate reality for US tech giants, which are essentially being punished for the regulatory overreach of the US intelligence community. The lesson from this ongoing situation should be clear: the world must work to de-politicize the interplay between technology companies and governments.

A recent letter from US Internet companies to the Obama Administration highlights the growing divergence in perspective maintained between the two sides. The letter - released to the public on December 9 from AOL, Apple, Facebook, Google, LinkedIn, Microsoft, Twitter, and Yahoo to the Intelligence Community - states, "We urge the US to take the lead and make reforms that ensure that government surveillance efforts are clearly restricted by law, proportionate to the risks, transparent and subject to independent oversight."

Last week, a report was released following a probe by a White House panel into the NSA's activities. It listed 46 recommendations for an overhaul of NSA activity, the most significant being a call for the NSA to shift their innumerable bits of stored data back to the private sector. The panel also (surprisingly) admits that there is no evidence that the mass collection of citizens' data is an effective means of preventing terrorism. This comes on the heels of a US court ruling that the NSA's collection efforts were unconstitutional.

Meanwhile, the recent fallout may prompt Beijing to take a more active role in promoting the development of China's indigenous software and hardware industry. [15] While not prohibited from purchasing Western-made technology services and equipment, Chinese firms will likely rely increasingly on domestic providers of technology equipment and services such as Lenovo, Huawei and ZTE. Ironically, the US intelligence community may have sown the seeds of the very relationship it sought to prevent.

1. Spiegel Staff. "Embassy Espionage: The NSA's Secret Spy Hub in Berlin" Spiegel Online International, October 27, 2013.
2. House Intelligence Committee. "Investigative Report on the US National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE".
3. Suffolk, John. "Huawei Cybersecurity White Paper" October 2013.
4. "Playing Down a US View, Britain Welcomes 2 Chinese Telecom Suppliers". New York Times, October 12, 2012.
5. Hutton, Robert. "British Probe Set to Clear Huawei of Allowing Spying" Bloomberg News, December 4, 2013.
6. Mandiat Security. "Exposing One of China's Cyber Espionage Units".
7. Gorman, Siobhan & Yadron, Danny. "US Presses Beijing on Cyberespionage" WSJ, June 7, 2013.
8. "Obama to press China's Xi to act against cyber spying", Reuters, June 4, 2013.
9. Chivers, Cory. "How likely is the NSA PRISM program to catch a terrorist?" June 6, 2013, and The Numbers Guy, "Ethics Aside, Is NSA's Spy Tool Efficient?" WSJ, June 14, 2013.
10. Mueller, John & Stewart, Mark G. "3 Questions About NSA Surveillance", The Chronicle of Higher Education, July 13, 2013.
11. "How Much Will PRISM Cost the US Cloud Computing Industry", Information Technology and Innovation Foundation.
12. "Vijayan, Jaikumar. "US cloud firms face backlash from NSA spy programs", Computer World, July 23, 2013.
13. Schecner, Sam. "Google Acts to Prevent Snooping by NSA", WSJ, November 26, 2013.
14. Gaouette, Nicole. "NSA Spying Risks $35 Billion in US Technology Sales", Bloomberg News, November 26, 2013.
15. Xiang, Zhang. "Domestic software sees opportunity in PRISM", China Daily, July 4, 2013.
16. Carr, Jeffrey. Mandiat APT1 Report Has Critical Analytic Flaws, February 19, 2013.

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing. Articles submitted for this section allow our readers to express their opinions and do not necessarily meet the same editorial standards of Asia Times Online's regular contributors.

Andrew M Johnson writes on cyber-security, sensitive technology and the aerospace industry. He is an undergraduate physics major at Clemson University and will be attending Nanjing University of Aeronautics and Astronautics in China in fall of 2014. He may be reached at andrew7@g.clemson.edu.M.

(Copyright 213 Andrew M Johnson)

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